“To open any of their annual reports these days, you have to wade through pages highlighting their environmental, social and governance (ESG) credentials before getting to their figures”.
This is a quote from a recent Irish Times article questioning the radio silence from Davy’s clients following the recent revelations and fine from the Central Bank. The statement expresses a certain level of cynicism about the integrity of heavily promoted ESG policies .
Greenwashing is the process of conveying a false impression or providing misleading information about how a company’s products or services are more environmentally sound. The label implies a cynical attempt to capitalize on the growing demand for environmentally friendly products, whether that means they are more natural, healthier, free of chemicals, recyclable, or less wasteful. Although some of the environmental claims might be partly true, companies engaged in greenwashing typically exaggerate their claims or the benefits in an attempt to mislead consumers.
In June 2020 the EU introduced the Sustainable finance taxonomy regulation EU 2020/852. This regulation defines sustainability and prescribes in law a classification system for sustainable economic activities, or taxonomy.
The objective is to establish clear European “green” criteria for investors so that 1. the EU can become carbon neutral by 2050, and 2. to prevent greenwashing by eliminating loose interpretations of sustainability by investment funds and large public interest companies. The legislation applies to all Financial Market Participants (FMPs) and listed companies with more than 500 employees. This covers approximately 6,000 large companies and groups across the EU, including:
- listed companies
- insurance companies
- other companies designated by national authorities as public-interest entities
What does it mean?
Going forward all financial products or listed companies that claim to be sustainable will have to prove it by complying with the very detailed and strict criteria set out in the legislation. This will require transformational change across all impacted entities in terms of their required levels of transparency pertaining to Environmental, Social and Governance criteria. The legislation will also have a profound impact on the level and quality of ESG reporting.
Will taxonomy make a real difference?
I believe the answer is yes, although it might initially feel like a case of two steps forward one step back! The steps forward are evident. Governments and consumers are demanding more transparency and accountability from large companies and organisations with material influence on environmental and social issues. All significant players will be keen not to be labelled as ‘non sustainable’ if they want to continue to add value for their shareholders and maintain market share. Consumers will finally have credible transparency on the sustainability of entities covered by the legislation. Information is power, and consumer behavior is they key to real environmental and social change.
As with all new legislation there will however be teething problems. The regulators (in Ireland’s case the Central Bank) will have to get a handle on interpreting the regulations and implementing/communicating new systems to manage and measure compliance. The annex to the technical report is almost 600 pages long, and this is in addition to the pending the Regulatory Technical Standards….not an enviable task!!
Effected entities on the other hand are faced with having to not only redefine and re-categorize their existing sustainability data, objectives and KPIs, but also having to most likely significantly expand the scope of their current sustainability systems if they wish to comply with the comprehensive legislative requirements. This will, in many cases, require initial investment in consulting services and technological infrastructures to collect, standardize and report the necessary data.
It is not just the entities to whom the legislation applies that will be effected. The implementation of taxonomy will have a cascade effect that will in time impact SMEs. Evidence of responsible supply chain management forms a significant element of the compliance requirements. Larger companies will rapidly move towards mandatory ESG tendering requirements that could risk eliminating many SMEs from even making a submission if they are not prepared. This will be a challenge for many SMEs who to not have the experience or resources to design and implement their own ESG policies. SMEs can expect to see ISO:14001 becoming in effect mandatory in the near future accelerating a trend that was already becoming apparent.
The mandatory disclosure of data will come into effect this week with the application deadline for the Disclosures Regulation on 10th March 2021. This particular regulation compliments the taxonomy regulation by laying down sustainability disclosure obligations.
To conclude, while the regulations do set out some specific compliance requirements, much of the detail of how to address the obligations will ultimately be prescribed by the corresponding regulatory technical standards which have been delayed to a later date in 2021. This means that in reality it will be 2022 before the real impact of the Taxonomy and Disclosure regulations will become apparent. Watch this space…..
You might like to read my previous article carolmcgee.ie/iso14001-is-it-really-voluntary.
If you would like advice on the design/implementation of a Sustainability/Environmental Management system you can book your free initial consultation here.